23 March 2000
The relentless trend for portals, or online trading communities, is hard to ignore. But with the clear benefits of economic, sector-specific one-stop shopping come concerns about marketplace domination. Marcia MacLeod reports
Astute onlookers have long predicted that business-to-business e-commerce will generate far more revenue than business-to-consumer transactions. The latest figures from e-procurement specialist Commerce One, revealed by its chief executive Mark Hoffman at the company's eLink conference in London last month, forecast that £35 billion worth of business-to-business goods and services will be traded over the Internet by the end of 2001.
At the same conference, BT told delegates that by 2002, e-commerce as a whole will amount to 5 per cent of the GDP in the US and 10 per cent in western Europe (UK, Germany, France and the Benelux countries), with business-to-business e-commerce accounting for 3.5 per cent. Research consultancy the GartnerGroup, meanwhile, reckons that by 2004, business-to-business e-commerce will be worth a staggering £4.6 trillion.
Now that e-commerce service providers have woken up to the potential of the business-to-business demand, they are, predictably, dreaming up all sorts of products, such as e-procurement or customer relationship management tools. And, along with the many new products come myriad new buzzwords, such as "m-business" (e-commerce conducted via mobile phones using wireless application protocol).
One of the most significant new developments of business-to-business e-commerce, however, is the advent of portal websites. Hailed as the answer to every organisation's electronic prayer, this involves the creation of online trading communities, often dealing in the same, vertical market, with the aim of making big savings.
Many new portals have been set up in the past few months and almost every day either a new venture, or a reshaping of existing alliances, makes the pages of the Financial Times. Forrester Research reckons that by 2004, electronic marketplaces will account for 54 per cent of all online business trade in the US and that, ultimately, they will handle between 45 per cent and 74 per cent of e-commerce in a supply chain.
Portal provider Ariba says that the pros of these electronic marketplaces are clear. It claims they allow companies to benefit from aggregated purchasing power, streamlined e-commerce processes and new efficiencies, and greater market opportunities, choice and competitive advantage (gained from open, Internet-based access to larger markets). Combined force
Some would argue that online trading communities started in reality about 15 years ago, when the first electronic data interchange (EDI) group was formed for the automotive industry. Although technology has moved on since then and EDI has been superseded, if not replaced, by the Internet because it is easier and cheaper to use, many EDI communities have expanded into e-commerce, linking suppliers and customers worldwide over the web.
The new portal sites do vary from the old EDI communities, however. EDI communities were often based on a "hub and spoke" structure - one large company acted as a hub and "persuaded" its suppliers to trade electronically (often through the threat of withdrawing its custom). A portal site, defined as a single gateway to a range of products and services on the web that are usually provided by a number of different vendors, is designed to enable several suppliers to talk to several purchasers through one connection.
There are two types of portal sites. The first are developed by or on behalf of a major manufacturer or retailer, such as those being launched by Ford, General Motors and DaimlerChrysler for the automotive industry; Sears, Roebuck and Carrefour for retail; and Cargill, Dupont and Cenex Harvest for farming. The second type are those developed and managed by a third party, such as those run by BT, Deutsche Telekom and Citibank.
Many portals, particularly the latter type, have initially focused on maintenance, repairs and operations (MRO), or indirect, goods, although such sites for vertical marketplaces are also beginning to emerge. Commerce One, for example, recently announced that it is adding direct goods to its MarketSite portal.Open doors?
One of Ariba's main portal sites, Petrocosm Marketplace, is being developed for Chevron Corporation. Due to go live before June, Petrocosm is being designed as an open marketplace for the oil and gas industry, allowing companies of all sizes to buy and sell drilling and electrical equipment, pipes, valves and fittings, and professional engineering and construction services. Chevron insists Petrocosm will be totally open, in an attempt to achieve industry savings that could be as great as £6.9 billion a year (up to 30 per cent per purchase) and to increase the efficiency of the company's business processes.
However, it is these very aims that worry many organisations. Petrocosm may help to increase Chevron's efficiency, but will Chevron really be prepared to give equal standing to its competitors, or to allow suppliers to trade freely and on their own terms with any oil or gas company that wishes to take part?
Unsurprisingly, Keith Krach, Ariba's chairman and chief executive, insists it will. "Chevron provides an excellent example of how a large, innovative buyer can both save and profit in the new economy by extending its own business-to-business e-commerce infrastructure and purchasing power to create an open, scaleable industry net market," he claims. Chevron says it believes in a neutral approach, but even the extension of ownership into an equity structure, with different participants each taking a stake, doesn't always allay the fears of bias.
Shell makes very similar claims for its Commerce One-developed portal, which leads us to another concern - if Chevron and Shell are both establishing portal sites, do suppliers have to join the two? Which industry players will join which community? Aren't we returning to the old EDI mentality - much criticised by the very companies setting up portal sites - that whoever holds the purse strings holds the power?
Shell MarketSite, like Petrocosm, has been set up as a separate, joint-venture company. Other energy companies "are taking a significant stake", according to Chris Phillips, Commerce One's director of European marketing. And because these portal sites are new, "everyone is constantly learning how to structure these things", he says.
"There are tiers of participation; smaller companies can't take the same size equity stake as larger ones, but they don't want or need the same model, either," adds Phillips. "Values are different for small and medium-sized enterprises - they want access to some of the buying power enjoyed by large firms. And no one will join a site if they find it puts them at a competitive disadvantage."
Smaller companies, especially suppliers, may also be unhappy if they lose some of their branding. Carl Falk, vice-president of the Global Trading Web at Commerce One, admits that, although there is "a lot of flexibility regarding policies and procedures of portal sites", suppliers may have to fit into the look and feel of a site. That look and feel could well be determined by the founding company, the Chevron or Shell. "Suppliers will keep pictures, logos, some of their slogans, but they may have to adapt to fit into the site."
Falk adds that any adaptation of a supplier's look and feel may actually be determined by the buyers, who want to see things in the order or style that suits them best. And, he points out, big companies are in a much better position to set up a portal than a third party. "It takes a lot of work and time to set up a vertical marketplace site."
Some sites have even less chance of neutrality. RS Components - long known as a pioneer of e-commerce, first with EDI and then with the Internet - is employing Commerce One to develop a portal site solely for its customers. Apart from the technology underpinning it, how is that different from an EDI community?
There are also "open" sites that have been launched by industry players. MyAircraft.com is a joint-venture company created by aerospace suppliers Honeywell and United Technologies, and software company i2. i2 is branching out into portal sites with its TradeMatrix solution in an alliance with Ariba and IBM. It also provided the infrastructure for computer industry site HightechMatrix, which has so far attracted the interest of Compaq and Hewlett-Packard. By virtue of including two major vendors at their launches, at least MyAircraft.com and HightechMatrix showed some degree of openness from the start.Shades of neutral
Other sites set up by third-party companies may be more truly neutral. Commerce One now has partnership arrangements with BT, Deutsche Telekom, Swisscom, Citigroup (owner of Citibank), Endesa in Spain, Portugal Telecom, the Sinar Mas Group and Nissho Iwain in Asia, and Compaq Taiwan and the New Taiwan Trading Portal to create independent portal sites in their respective countries. It has also teamed up with Cephren, a collaboration and e-commerce service company, to set up a portal for the US construction industry, and with steel producer Ispat International to set up one for the steel industry.
These local portal companies may, in turn, use their technology for the development of horizontal portals (for products that apply to all businesses, such as stationery) or vertical portals (for specific sectors, such as the construction industry) - known as "hortals" and "vortals". BT, for example, has helped Irish company W&G Baird to set up a site for the paper industry. It has also joined forces with the European arm of US company VerticalNet to create VerticalNet UK, which was due to go live in February. The industries that will be targeted first have yet to be announced, but VerticalNet already runs 55 portals in diverse fields, ranging from medical design to hospitality.
However, some companies have set up "neutral" portal sites without going to major technology providers. Lightseek was launched by Tim Rosen and Leslie Kent to provide information on lighting for architects, surveyors, designers and electrical contractors. The pair have also set up trading sites for the heating, ventilation and air conditioning, plumbing, electrical, construction, facilities management, aviation and aerospace sectors.
The World of Fruit, although initially funded by Fyffes, is a third-party site for all fruit buyers and sellers. At the moment, sellers can post up details of available produce, and the aim is to allow buyers to request supply. More than 100 users have registered on the site since last November.Internet auctions
Both Lightseek and World of Fruit are expanding into another type of new electronic trading community - online auctions. They are using OpenSite's auction technology, which is also being used by office equipment supplier Concord and Millennium Minerals, which has set up a construction industry auction site.
Auction sites work as a physical auction does. Sellers enter a reserve price and producers enter increasingly high bids until one wins. Some sites also offer reverse auctions, in which the buyer requests a certain product at a particular price, and the company offering the lowest bid below that price wins the business.
GoIndustry.com auctions surplus equipment across a range of products and industry sectors, and LightingBuyer auctions surplus lighting goods. As well as being a channel for selling stock that is notoriously hard to get rid of at a reasonable price, the latter was also seen as a way of introducing e-commerce to the lighting industry.
When Rosen and Kent considered setting up a trading site, three major distributors said they would encourage other companies not to co-operate. Such strong-arm tactics are a little surprising, to say the least. Forward-thinking distributors would realise that not only could they use this as an opportunity to become involved in e-commerce themselves, but that it would be pointless to resist.
As well as the obvious advantages of joining an online trading community, some new portal sites offer web design facilities, digital certificates and supply chain management software. But, despite the benefits, be alert to the questions you must ask a provider before signing up.
Neil Costa, portal and marketplace marketing manager for US technology firm Open Market, highlights the three things needed for a successful community: good content, a good sense of community and a development of commerce. Without these elements, an online community is no better than any individual company sticking a catalogue on the web. However, if all the elements are present, portals could be the "killer application" that ensures business-to-business e-commerce lives up to its expectations.
Questions to ask portal providers
• Who set up the site? Will the founder of the site, or any other player, have power over any other member? Will any member be able to get their name in front for a higher fee?
• Will advertising be accepted and how will it affect the site? Will companies that advertise be given more prominence than those that don't?
• Will members be able to keep their logos, slogans and branding?
• Can my own trading partners be added to the site? Are there any restrictions on membership? Has any major industry player refused to join? If so, why?
• Can existing back-office systems, including supply chain management and procurement, be integrated to the portal-facing software easily and cost effectively?
• Who pays, and how much? (Prices vary tremendously. Often membership is free, although setting up a website, electronic catalogue and so on will require a substantial outlay. The portal site is usually paid for by a transaction fee, either a flat charge or a percentage of sales. Read the small print before signing anything.)
• Is there an online payment mechanism for goods sold through the site, or do traders have to rely on purchase orders and invoices?
• What security measures are in place?